Tax Reform Just Got Real. Why the GOP Tax Plan Is Great News for America.

COMMENTARY Taxes

Tax Reform Just Got Real. Why the GOP Tax Plan Is Great News for America.

Sep 27th, 2017 3 min read
COMMENTARY BY
Adam Michel

Policy Analyst

Adam N. Michel focuses on tax policy and the federal budget as a Policy Analyst in the Thomas A. Roe Institute.
Republican leaders unveiled the outline of their tax plan on Wednesday, receiving the endorsement of President Donald Trump. Ron Sachs/CNP/Sipa USA/Newscom

Bold tax reform got a big boost on Wednesday.

Leaders in the House, the Senate, and the White House have all agreed on a tax outline, meaning a true update to our broken tax system could be imminent.

First, the GOP tax plan framework would lower taxes for individual Americans. It would double the standard deduction for individuals and thereby expand the zero-percent bracket, and it would create three income tax brackets (down from seven): 12, 25, and 35 percent, respectively.

Most simply, this will allow all Americans to keep more of their hard-earned money in their pockets.

Importantly, the plan goes a long way toward fixing our business tax system, which makes it hard for U.S. businesses to invest in new equipment and new factories. Slow investment caused by our high and distortionary taxes has limited American job creation and slowed wage growth.

This isn’t some hidden truth known only to economists. Almost 80 percent of Americans understand that high corporate taxes lead to lower wages and encourage corporations to do business outside of the U.S.

The proposed new 20 percent corporate tax rate would mean a raise for hardworking working Americans.

To maximize its benefits, tax reform must include permanent full expensing. This would allow companies to write off the cost of investments they make in their own workplace immediately, such as the cost of office space needed to hire additional workers.

Right now, the proposal grants five years of expensing, but that can easily be expanded at little additional cost. This simple change, if made permanent, could grow the economy by more than 5 percent over 10 years.

Without full expensing, the current system will continue to keep the cost of investing artificially high, thus discouraging business expansion.

The benefits of expensing are not just for large corporations. All businesses can take advantage of expensing, big and small. Permanent expensing must be a primary component of any tax reform plan that emphasizes economic growth and job creation.

The new proposal also includes a territorial business tax system. This would put American businesses on a level playing field with their foreign competitors and finally bring overseas profits back to the U.S.

As reform moves forward, focus will also turn to the more contentious reforms, some of which we cannot forget.

For years, politicians have called for getting rid of “special interest tax breaks” and “closing loopholes.” That sounds good in theory, but as soon as Congress gets specific, K Street lobbyists will swarm Capitol Hill to protect their favorite handouts.

One of the most important reforms in this vein is to eliminate the state and local tax deduction.

This provision benefits only a minority of taxpayers and creates a federal subsidy for expansions of government at the state level. This forces people in low-tax states to subsidize big-government states like California, Illinois, and New York.

The state and local tax deduction is both bad policy and unfair.

The tax code should not be used to pick winners and losers. The final tax package should eliminate unjustified tax subsidies that benefit politically favored industries, such as the myriad tax breaks for wind farms, solar panels, and nuclear electricity production.

There are countless other examples of preferences that need to go: the research and development tax credit, education tax credits, and the exclusion for municipal bond interest, the deduction for U.S. production activities, and the credit for low-income housing investments, to name just a few.

The president has already indicated that he would like to keep some of these provisions—but updating the tax code for the 21st century requires more than just cutting taxes.

True reform will include structural reforms like allowing permanent full expensing and rooting out all the accumulated carve-outs for special interests wholesale—not just the tax subsidies that are easy to get rid of.

Lastly, the GOP tax outline includes a new lower pass-through business rate of 25 percent for businesses that pay taxes through the individual tax code, repeal of the estate tax or “death tax,” and repeal of the corporate and individual alternative minimum taxes to simplify the tax system.

Each of these additional reforms should strengthen support for tax reform and add an additional boost to the economy.

Tax reform that follows the outline we heard from the president and Congress on Wednesday can truly make America great again by unleashing higher wages, more jobs, and untold opportunity.

This piece originally appeared in The Daily Signal